Hedging Strategy Design

Overview

Design systematic hedging plans for existing positions, covering linear hedges (futures / ETFs) and nonlinear hedges (options). Output hedge ratios, cost estimates, and execution plans. Core principle: hedging does not eliminate risk; it exchanges unknown losses for known costs.

Core Concepts

1. Beta Hedging (Futures / ETFs)

Principle: hedge portfolio systematic risk (beta) with index futures or ETFs while preserving single-stock alpha.

Hedge ratio calculation:

# Minimum-variance hedge ratio
hedge_ratio = beta_portfolio * (portfolio_value / futures_value)